Tax Analysts Blog

The Devil You Know

Posted on Jan 12, 2017

I have often said that tax reform is like the weather – everyone talks about it, but no one does anything about it. With Donald Trump about to become president, and his Republican allies in control of Congress, it would seem to many that tax reform is all but a done deal.

But tax reform is in the eye of the beholder. Just as the term itself means different things to different people, the elements of any given effort at tax reform resemble a tub of Play-Doh, before the stuff becomes an actual thing. What ultimately emerges from the pliable, sweet-smelling goo depends on the vision and skill of the crafters. And one observer’s “tremendous” could be another’s “disaster” (to borrow two of the president-elect’s favorite words). 

It isn’t as though Congress has given no thought to the subject. The Camp plan – developed through thoughtful input and discussion – has sat on the shelf for years. In the interim, the House has devised its own tax reform blueprint. But that blueprint is so lacking in detail that any building constructed from similarly detailed blueprints would collapse long before it was complete. At the same time, the chair of the Senate Finance Committee has floated his own loosely constructed concept for tax reform, which relies on corporate integration.

In place of actual tax reform plans that could conceivably be enacted into law, we have heard platitudes like “business friendly” repeated ad nauseam. Politicians have promised to broaden the base and lower the rates. But to get the rates anywhere close to what members keep touting, Congress would have to eliminate nearly every tax expenditure in the code, including many business-friendly ones.

The latest mantra is the easy to say, yet hard to grasp, concept of a destination-based cash flow tax. And while the details have yet to be fully fleshed out, this new concept has an appeal, especially for advocates of simplification. Income would be taxed in the country where the consumer is located, regardless of the location of the business entity that develops the product, owns the intellectual property rights, or maintains a store. That feature alone could eliminate many of the costly inefficiencies in the international tax system, saving big bucks.  

The problem with these approaches to tax reform is that because they change the current system, each one creates winners and losers. And each winner and loser will do whatever it takes to lobby Congress to support or oppose the particular aspects of any reform plan that affect them. Lobbyists for the fossil fuels industry will fight to the death any effort to reduce or eliminate the current tax expenditures for their industry – even if it might result in a marginally lower rate. Citizens in states with high local taxes will fight to avoid having to pay federal income taxes on their state and local taxes – even if doing so would enable them to file their returns on a postcard, as some politicians have promised. Sellers of imported products will object to the border adjustments inherent in a destination-based cash flow tax. And so on.

Author Thomas Friedman has described Congress as “the sum of all lobbies.” Because none of proponents have released a detailed, comprehensive tax reform proposal, those lobbies have largely kept their powder dry. But once such a proposal surfaces, expect them to bring out the big guns and start firing. Tax reform may not survive that onslaught, particularly if the prevailing attitude is better the devil you know than the devil you don’t.  

 

Read Comments (7)

Mike55Jan 12, 2017

I assure you the lobbies have (1) not "kept their powder dry," and (2) do not need to see complete details to dive into the fray with gusto. Consider that lobbies serving the tax exempt investor community have already succeeded in scrapping the Hatch integration plan, despite that (as you point out) it has yet to be fully unveiled. The lobbying efforts around the "Better Way" plan remain constant/intense.

As for your larger point: the goal is not to avoid "losers," which is of course impossible in any tax legislation. The goal is rather to avoid a scenario where losses are concentrated but the benefits are highly dispersed, which is a recipe for disaster (see e.g., the Camp proposal). Much better to ensure the winners are concentrated and the losers are highly dispersed. In that scenario tax reform can happen, and that is exactly what the House Republicans are attempting.

Either way, I think the biggest hurdle to tax reform at the moment is the JCT. Republicans might have forced dynamic scoring into being as a budget gimmick, but in the process accidently created a very effective safeguard against the enactment of poor tax policy. As things stand now, business tax reform will ONLY happen if the JCT says it will improve the economy over the next 10 years. So regardless of distribution, in aggregate total "winnings" must exceed total "losses."

Bob GoulderJan 12, 2017

Same old problem w/r/t winners-v-losers. I'm reminded of Jean-Baptiste Colbert (King Louis XIV's finance minister) who famously declared “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” And these days retailers & importers are doing a lot of hissing (re DBCFT).

Edmund DantesJan 13, 2017

I expect that Trump's approach to governing will be as unconventional and surprising as his approach to campaigning. He's going to be a bull in a china shop, discarding politically correct nostrums, which many voters will applaud. One of these nostrums might be trying to garner the JCT's approval of legislation before enactment. After all, JCT was gamed for Obamacare, none of their predictions have panned out, and nobody cares. I've long wondered why we bother asking for their educated guesses, given their track record.

Did anyone think, in January 1981, that the top income tax rate could be chopped to 50% within 8 months? I did not, even though I supported the idea. The Donald is not beholden to any lobbying group. It's just possible that he will be able to work around them, if Congressional Republicans believe he has a winning hand.

Mike55Jan 18, 2017

Perhaps, but I very much hope that you're wrong. We've now seen exactly what happens when the old school "bully pulpit" method is applied to modern politics, and the results aren't pretty. There's a lot of finger pointing and blame laying left to be done before Obamacare is officially behind us, but the larger lesson is that simply steamrolling all opposition is no longer a viable long-term political strategy.

This is where the JCT comes into play on tax reform. A good JCT score would coalesce and intensify Republican support, which is hugely important: the lukewarm support of Senate Democrats was just as responsible for Obamacare's demise as anything the Republicans did. Further, a good JCT score would take tax reform out of the immediate cross-hairs of Democrats. The Warren and Sanders types will try to obstruct everything Republicans do no matter what, but that's not every Democrat. A good JCT score would convince the Schumer and Neal type of Democrat that there are bigger fish for their party to fry.

Travis RechJan 19, 2017

They have no replacement for Obamacare so they can't repeal it. Lot's of tough talk but no action so far simply because the economics of providing universal coverage isn't so easy to resolve. And at this point it isn't political viable to take coverage away from people who have it, so the Repubs are caught in their own noose. The "best" they can likely do is shift the tax burden of the ACA to a more broad-based and possibly regressive tax scheme.

Edmund DantesJan 19, 2017

In touting the political advantages of a good JCT score, you are revealing that the JCT is just another political institution. You seem to be assuming that JCT is a neutral arbiter of the consequences of legislation, but they are not. They do not reveal their methods, and their record for accuracy is poor. I'd love to see a detailed study of their projections and the actual outcomes.

I've seen many outlandish predictions from the JCT. For example, a few years ago they scored the revenue cost of a one-year extension of the charitable IRA rollover in the tens of millions of dollars. The rollover option had expired, was not available for 11 months, and the extension was to be enacted in December (with retroactive effect, but no sensible person would have done the charitable rollover before being certain of the tax consequences). Keeping in mind that the rollover is capped at $100k, how many maximum rollovers would be required before the tax loss reached tens of millions of dollars? Especially given the fact that under existing law, those who wished to give $100k had the option of taking a distribution and making a charitable gift? The tax benefit of the charitable rollover is only marginally higher than that, but evidently JCT assumed that no one would take that path. The more I looked at that projection, the less it made sense.

Sure, a good JCT score would be a political win. There is almost no chance of it happening. It should not be an obstacle to tax reform.

Mike55Jan 19, 2017

The JCT doesn't need to highly accurate and wholly unbiased: they simply need to be MORE accurate and LESS biased than the next best available option. Right now they fit that bill.

So while I disagree with your view of the JCT (I think they do a good job), ultimately that's not what matters. No one has any clue what major tax reform will do to the economy 10 years from now... the goal is having some educated baseline for comparing alternative options. The JCT provides the best opportunity for doing that, so people care about their views.

By the way... I'm not sure why you're so pessimistic about how the JCT will score republican tax reform proposals. Hatch allegedly received a good score on his corporate integration plan, so to the extent there's bias at work as you suggest, at the very least it can be overcome.

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